SIA Sets Sights On Secondary Cities In China

Singapore Airlines (SIA) wants to gain a stronger foothold in China, emulating its recent expansion into secondary markets in Australia, thanks to its partnership with Virgin Australia.

“We are actively pursuing partnership opportunities in China and parts of Southeast Asia,” CEO Goh Choon Phong said during a Nov. 5 briefing in Singapore.

Industry executives tell AviationWeek that China is the market Goh is eyeing most closely and that Goh is hoping to strengthen SIA’s relationship with Star Alliance partner Air China as a means to achieve this. However, SIA’s spokesman declined to confirm or deny this when asked by AviationWeek. “As for China, we don’t have anything specific to provide at this point, but it is clearly an important market for us and where we will continue to increase frequency and look at new destinations,” says the spokesman.

SIA in 2007 tried to buy a 24% stake in China Eastern Airlines, but Air China vehemently opposed the deal, which ultimately failed to gain approval from Chinese authorities. There are basically only four major airlines in China – AirChina, China Southern Airlines, China Eastern and Hainan Airlines – because in recent years most of the smaller carriers have either closed or merged with one of the big four airline groups.

In a separate development, SIA recently signed a deal to buy a 10% stake in Virgin Australia. SIA has already received Foreign Investment Review Board approval from Australia and the transaction will be completed on Nov. 16.

Goh says owning a stake in Virgin Australia helps cement the relationship that already exists between the two carriers. “Australia is a very important market for us. We intend to have 124 weekly services into Australia by the end of this financial year,” he says. SIA already serves nearly all Australian capitals. But Goh says, “Within Australia there are many secondary points, so to be effective and to provide the consumer with connectivity,” SIA needs help from Virgin Australia. SIA and Virgin Australia code-share on several routes.

SIA, meanwhile, has been using SilkAir to reach secondary cities in China, such as Chongqing and Kunming. SilkAir operates 22 AirbusA320-family aircraft and will receive two more next fiscal year and at least 54 Boeing 737s in 2014-2021. SIA’s fiscal year starts April 1.

SilkAir ’s narrowbodies, however, lack the range to serve northern China, so SIA group has been using its medium-haul, low-cost carrier Scoot to reach secondary cities in northeastern China, namely Tianjin, Qingdao and Shenyang. Scoot operates four Boeing 777-200s. SIA disclosed that Scoot will be adding the first of 20 Boeing787s in 2014.

The 787s originally were ordered for SIA mainline. The fact that SIA is transferring the 20 787s on order to Scoot explains why SIA last month ordered 20 additional Airbus A350-900s for the mainline operation, increasing the total number of A350-900s on order to 40. First deliveries are planned in 2015.

Goh says the 787’s greater fuel efficiency will enable Scoot to better compete with other medium-haul, low-cost carriers. AirAsia X, for example, operates A330-300s and has Airbus A350-900s on order. Goh says, “The 787 with the kind of capacity and configuration that it has, we decided it was best suited to Scoot. The A350 has greater capacity, so it’s better suited to SIA mainline with its [premium] positioning in terms of product.”

The airline in its latest Airbus deal, also exercised options for five more Airbus A380s and persuaded Airbus to buy back its five Airbus A340-500s. Because the A340-500 sale is part of a bigger deal for A380s and A350s, SIA may have received a good price from Airbus for the unwanted A340s. If that is the case, SIA will have avoided a big write-down on its books like what happened in the first half of this fiscal year. SIA says its operating profit increased in the first half by S$8 million ($6.5 million), but its net profit still fell 30% to S$168 million, partly because it took a S$67 million loss on disposal of aircraft. The disposals included Boeing 747-400 passenger aircraft, which have fallen in value because of high fuel prices.

Corrections and changes:

Comment from SIA spokesman added in third paragraph.

Fifth paragraph changed to note that the Virgin Australia equity purchase has received regulatory approval.

Eighth paragraph changed. The story originally stated that Scoot is not adding more aircraft next year, but Goh was only referring to new-build aircraft.